What is a FAMILY OFFICE? How can it help family businesses?
“Today, someone is sitting in the shade because someone planted a tree long ago.” [1]
Warren Buffett
[1] “Someone's sitting in the shade today because someone planted a tree a long time ago.” —Warren Buffett
When the family's wealth and assets have become a "burden" that must be managed or even cause the family to "quarrel", it may be time for the family to use the services of a Family Office.
Family offices have been around for a long time in the Western world. Billionaire John D. Rockefeller set up a family office as early as 1882, while the famous chemical manufacturer and distributor Dupont Company evolved from being a “family office” owned by the descendants of Irene Du Pont, her father and gunpowder manufacturer, since 1834.
The concept of family offices is not new, but it has increasingly been mentioned as a powerful “business unit” in today’s global economy. Some reports estimate that assets under the care of family offices were worth as much as 6% of the global stock market value before COVID.[2] Plus, in an era where economics and investment are becoming increasingly complex, managing family assets and wealth has become increasingly demanding and demanding expertise.
“Family Office” is one of the tools that will help families with a lot of assets to manage their wealth effectively, both in terms of investment, tax planning and passing on assets to the next generation.
What is a Family Office?
A Family Office is an office used exclusively by high net worth families to manage their family wealth. The primary functions of a Family Office are to manage family assets and investments, tax planning, estate management, inheritance planning, legal document management, and other personal services. The Family Office plays a key role in preserving and growing family wealth sustainably from generation to generation.
Currently, there are 3 types of Family Offices:
- Single-Family Office (SFO) : SFOs are designed to serve a single family, perhaps as a standalone entity or as an “office” that is part of the family firm. SFOs are highly tailored and offer high confidentiality and exclusivity, but can also be expensive, as they involve hiring full-time professionals such as lawyers, accountants, tax planners, financial advisors, etc.
In addition, the expertise of staff working in SFOs may be less than that of outside specialists who serve multiple families or have more experience, and the closeness of SFO staff to family members may make personnel changes more difficult.
- Multi-Family Office (MFO) : Providing services to more than 2 families at the same time, it can reduce costs by sharing resources between them (economies of scale), but it is less flexible and private than SFO. It is suitable for families with less complex needs. Most service providers are stock brokerage firms, funds, insurance agencies, law firms, finance, accounting, tax, and private banks, etc. The cost of MFO is usually collected in the form of an annual fee, which is calculated in proportion to the assets under management (approximately 1-1.5% of the asset value).
The weaknesses of MFOs are that the services available to families are mainly limited to those of service providers and partners. In addition, MFO services are standardized, which makes them less flexible than those provided by SFOs.
- Virtual Family Office (VFO) : It is the latest type of Family Office that has emerged from today's efficient communication technology. VFO can provide services to many families simultaneously, helping to reduce costs and providing more flexibility in selecting specialists than other forms of Family Office because it is an outsourced professional from various locations. In addition, VFO is suitable for families where members live or work in several countries. The service fee of VFO is approximately one-half to one-third of that of MFO.[3]
However, VFO also has weaknesses, such as most of the consultants are outsourced, which means that the overall picture or goals of the organization may not be in the same direction. Even if you get the best service from consultants in each area, it may not meet the family's big goals at all. Privacy may be reduced because there are many consultant teams that have access to the family's information at the same time, etc.
Duties of the Family Office
The duties of a family office will consist of four main missions as follows:
- Wealth Management & Family Investment : Managing family assets and investment is the primary duty of the Family Office in accordance with the family's policies, such as the accounting of common assets and continuous reporting, the use of family assets for various purposes, such as renting out, collecting rent, following up on debts, planning and managing investment portfolios in line with the family's policies and risk profile, establishing trusts abroad, etc.
- Tax & Legal Affairs : Tax planning and legal paperwork such as filing taxes, tax returns, estate planning, executing wills, prenuptial agreements, etc.
- Administrative Services : Service work for family members, such as disbursing various welfare benefits such as education fees, health insurance, life insurance, medical expenses, etc., including providing other miscellaneous services that are public work, such as scheduling family meetings, family council meetings, facilitating communication between members, etc.
In addition, a family office may also provide personal services, such as booking flights, picking up children from school, or feeding pets. However, it is important to agree on what services the family office can and cannot use to avoid conflicts.
- Philanthropic Activities : Family Offices abroad also help take care of and manage family charitable activities. However, many families may view charitable activities as personal and should not be a shared family expense.
Your family should have Family Office or not?
Now for the important question, there are 3 key factors that will help you decide.
1) “Property value” Families with a lot of assets often encounter problems such as differences of opinion among members on asset management or unsystematic management. Family Offices can effectively solve these problems by establishing a transparent and professional management structure. Asset and investment management is done by experienced professionals, so the burden of managing the central asset pool is not shifted to any one member. However, if the number and value of assets are not much, it may not be worth the cost of having a Family Office.
The question of how much assets one needs to have in order to have a Family Office is one that varies from $5 million to $50 million (emphasis on “Cold money” – Assets that are ready to be invested immediately[4]) Therefore, the advice is that if the assets start to become so much that it becomes a burden for the members to manage themselves, it may be time to have a Family Office.
2) “Complexity” For example, a family that has many types of investments, such as investing in bonds, various financial assets, investing through private equity or venture capital, or investing in real estate both domestically and internationally, or investing directly in other businesses that the family is not skilled or experienced in, etc.
The complexities of asset management as mentioned above will be a burden for members who are responsible for managing the common assets, which means “If you do well, you will break even, but if you make a mistake…” Therefore, to achieve the highest efficiency in family asset management, it is a reasonable idea to have consultants who are experts in various fields to help, and it will help reduce conflicts.
3) “Privacy” If privacy is the ultimate goal and you don't want outsiders to know or get involved at all, then only family members can handle it themselves. However, you can do it yourself and use the services of various professionals, such as a trusted accounting firm, the family's lawyer, or a close financial planner. It's called using it as a task.
If this is the case, then the family members who perform this function can be called a “Living Family Office”! In the past, not many people wanted to perform this function. Therefore, for families that emphasize privacy, the SFO-style family office option may be the most suitable answer. However, it must be admitted that the best people may not be available to help manage the business, but the people the family trusts the most will likely be available to take care of the family assets.
Setting up a Family Office is an important decision for high net worth families, allowing for professional asset management. However, setting up a Family Office requires a combination of factors, such as family goals, appropriate Family Office services, and a team that is acceptable to family members.
Including regular communication between family members regarding family assets to make the Family Office an important tool for maintaining and increasing family wealth, as well as strengthening family relationships for sustainability in the future.
References:
- Adam Hayes, “What Is a Family Office and Do You Need One?”, Investopedia, Updated February 18, 2024
- Matthew F. Erskine, “Do You Need An SFO, MFO or VFO?”, Forbes, Updated January 12, 2022.
- The Economist, “How the 0.001% invest,” December 2018
- “Family Office”, Wikipedia, September 27, 2024
refer
1 “Someone's sitting in the shade today because someone planted a tree a long time ago.” —Warren Buffett
2 The Economist (2018)
3 Matthew F. Erskine (2022)
4 authors
